How To Increase Our Savings Rate and Accelerate Our Financial Independence

Today’s guest post is written by Ricard from Escape to Freedom. I think he put together a killer post on the number one factor it takes to accelerate our path to financial independence: our savings rate! I hope you get as much out of the article as I did!

Without further ado:

How To Increase Our Savings Rate and Accelerate Our Financial Independence

We all have “light-bulb” moments along our path towards financial independence when everything suddenly clicks into place and we acquire a new level of understanding. From learning that money can actually allow us to retire decades early, to experiencing the first returns from our investments. For me, the biggest moment was realizing that it all comes down to the savings rate.

Simply put, having a high savings rate will mean you’ll be able to become financially independent pretty quickly. The beauty of this is how absolute it is; a 50% savings rate will make a minimum wage earner financially free as quickly as it will a multi-millionaire. This is exciting (I admit I may have a slightly alternative definition of exciting!) for two reasons:

  1. Anyone, at any income level, can realistically become financially independent.
  2. Accelerating financial independence boils down to increasing this number – nothing else matters as much.

When you’re armed with the knowledge that all you have to do is increase that number by 1% at a time, the gargantuan task of becoming financially independent suddenly becomes a lot more manageable. Matt himself wrote an article a while back about how a 1% increase in your savings rate could shave two years off work. For some people, a 1% increase will mean saving another $15 per month by only getting coffee three times a week instead of five. For others, it’ll mean saving $50 by buying the cheaper food brands.

While I’m convinced that most people would be able to save another 5 to 20% if they were serious about reaching financial independence, there are some things that are simply worth spending a little more on. Things that make our lives better.

This is why I believe the best way to significantly improve your savings rate is to focus on earning more money.

There is a limit to how much money you can save if your income stays the same, and there are some fixed expenses in your life that you won’t be able to radically reduce. Imagine trying to halve your housing cost – it may be possible for some people on higher incomes, but I can’t imagine anyone on the lower salary side of the spectrum doing it.

Here’s the good news: Increasing your income has no limits. There is nothing holding you back from making more money with your time.

Have a look at an article I wrote, which introduces 8 online business models that you can use to make side-income. None of these require any previous studies or outstanding skills that you don’t already possess. The best part is that all you really need is about an hour a day after work. That’s enough to put in the work and start earning more money on the side.

Take Kindle publishing for example, as it’s the business model that I’ve been focussing on myself. It consists of writing non-fiction e-books on very specific topics that people will benefit from. The system is fairly simple: write a book, make the cover and publish it on Amazon Kindle. After a bit of marketing, you’ll get paid for each sale, for as long as the book sells.

You can even hire a ghostwriter and a graphic designer to produce the content for you if you want to save time. Once the book is on Amazon it will provide you with a nice source of passive income.

This is what I like to call a 10-percenter business – one that will increase your savings rate by an overall 10 %.

Take a moment and add 10 to your current savings rate and crunch the numbers using All of a sudden you’re years closer to retirement and all it takes is a few hours a week to set up the operation.

In other words, you can trade a small amount of extra work for years of freedom. It’s a pretty good deal when you think about it this way, and “future you” is going to love you for it.

Let’s use a fictional example to drive my point home. Meet Brendan, a 30-year-old computer engineer with a savings rate of 20%. Since he has no previous savings, he should be able to become financially independent in 37 years, just around the average retirement age – not very exciting.

He wants to increase his savings rate, but he doesn’t think a promotion at his current job is very likely. That’s why he decides to start a 10-percenter business. He works for an hour after work, Monday to Friday, so he doesn’t have to compromise his weekends.

In a few months, his side business is generating a steady profit of $200 per month which is going straight into savings. Since his expenses remain unchanged, this increases his savings rate from 20 to 30%, cutting his retirement date by 9 years.

After a few more months of growing his business, he decides to pay a virtual assistant to run the bulk of his business for him. Despite the added cost, he still makes a net profit of $200 each month, which is now mostly passive. At this point Brendan could choose to start a different 10-percenter business, getting his savings rate to a respectable 40% and be able to retire a further 6 years earlier. And just like that, his life is much better than before.

The best thing is that this example assumes that his savings rate is fairly low, he doesn’t have any savings, and that he is never going to get a pay-rise at work. Neither of these assumptions is very realistic, so your own situation is likely to be even better!

What I’d like you to take away from this article is that making an extra few hundred bucks a month requires less work that you might think. It’s also definitely easier than saving a few hundred more than what you’re already saving. As you can see, the benefits can be huge, bringing financial independence from a utopian scenario to a realistic certainty.

Thanks for reading. What do you think about starting a side business to supplement your income? Have you got any experiences that you’d like to share?

For more advice on how starting an online business can accelerate financial independence for you, and to follow my own journey, check out my site Escaping to Freedom.

14 comments… add one
  • The Green Swan Sep 16, 2016, 7:11 am

    Thanks for the guest post, Richard. I look forward to checking out your site more. I’m a big fan of doing everything you can to reach FI quicker including increasing your income. Although a side business is a good avenue to do so, my approach has been putting in extra time at my current job to do it better and position myself for continued promotions and advancement. Not that different if an approach really, and similarly it has added greatly to my income (although not as immediately).

    • Ricard Torres @ Escaping to Freedom Sep 16, 2016, 7:44 am

      Thanks Green Swan, big fan of your blog!

      I also like your approach to increase your income. If your job has opportunities for promotion, it’s definitely the best way to make more money, as the effort to reward ratio can be very high.

      What I love about setting up a side business is that anyone, regardless of the kind of job they have, can do it. The potentially passive element of it is also a big bonus.

  • FinanciaLibre Sep 16, 2016, 9:08 am

    Nice post, Richard!

    I think you make some great points. Both levers – savings and income – are essential for FI and early retirement. And, as you suggest, it’s simply easier for some people to increase income via side gigs than it is to substantially increase the savings rate without that supplemental income. I guess there’s always a risk that focusing too much on side gigs can distract from the core career the person has. Just a thought. Great post – thank you!

    • Ricard Torres @ Escaping to Freedom Sep 17, 2016, 4:12 am

      Thanks, FinanciaLibre!

      That’s a very interesting point. I guess that, if you’re anything like me, it’s easy to get into something almost obsessively. If you’re thinking too much about your side business while you’re at your main job it could impact your performance, and that’s no good! In that case, I would suggest a conservative approach to a side business, and being strict about only thinking and working on it outside of work.

  • Financial Panther Sep 16, 2016, 9:29 am

    You are spot on about earning more income through a side hustle! I’ve been doing that exact same thing and just saving the entire amount earned. If you’re a 1099 contractor in your side hustle, you can open up a Solo 401(k) and put the entire amount in as your employee contribution, assuming you aren’t maxing out your 401(k) at work!

    And you are right, it doesn’t take very much work to make an extra $200 per month. I’ve been documenting my side hustle income using sharing economy websites, and have been able to bring in well over $1000 per month just doing things I’m already doing! Great post!

    • Ricard Torres @ Escaping to Freedom Sep 17, 2016, 4:21 am

      Hey Financial Panther,

      Thanks for the tip on the 401(k), especially from someone who doesn’t get an employer match. And great job on your side hustles! I’ve seen that you’re doing super well, especially with Airbnb. That’s a venture I’d like to get into in the next few years, as a means to diversify my income as much as I can. If I do half as well as you, I’d be thrilled!

  • Jon @ Be Net Worthy Sep 16, 2016, 11:37 am

    Richard, you are right about the savings rate. It’s so critical to achieving FI. What’s great about a side business as well is that 100% of the profits can be saved which is huge. It’s very easy to double or even triple your savings rate, which you pointed out. I don’t think that many people realize how powerful that can be. Ironically, I’m posting an article on this same topic Monday – lol!

    I’m heading over to check out your site now!

    • [email protected] Smarter Decisions Sep 16, 2016, 10:29 pm

      Thanks for this post Richard! I am going to look into the Kindle publishing next year once I get the whole blog thing down better! I am heading to your site too and I’m looking at your 8 business models. Nice post!

      • Ricard Torres @ Escaping to Freedom Sep 17, 2016, 4:34 am

        Hi Vicki,

        Thanks for the kind words! Kindle publishing has been a great way to make some money on the side, and I’m sure you’ll be successful with it too. The best thing is that once you put your books up and market them, they should keep selling without much further effort. I’ll be writing more about Kindle publishing, as well as revealing my own results in the coming weeks.

    • Ricard Torres @ Escaping to Freedom Sep 17, 2016, 4:27 am

      Hey Jon,

      That’s the thing – the savings rate is the most important factor in reaching FI, but it took me quite a while to really understand it. Hopefully, when more people read this article and yours on Monday it’ll all “click” for them.

      Make sure you ring the doorbell before you enter my site – I need to hoover and clean up a bit first! 😉

  • Cindy @ Smart Family Money Sep 17, 2016, 1:04 pm

    It’s a very good point that increasing a family’s income is often the easier way to increase their savings rate. In my case, I am a SAHM, so any income I bring in is an increase to our family’s income. I am hoping that blogging and other “side hustles” will help me bring in more income while allowing me the flexibility to stay focused on my #1 job of taking care of our kids and running our household. I’m also interested in your information about Kindle publishing.

    • Ricard Torres @ Escaping to Freedom Sep 22, 2016, 6:24 am

      Hey Cindy,

      It’s great that you’ve got your priorities straight, which is something a lot of people I know haven’t got. Any amount of money that you can make will go straight to savings, so you’ll see how your savings rate rises pretty quickly.

      Kindle has been an amazing source of income for me, and I’ll be writing about it on my blog pretty soon. The ROI is phenomenal, and the better you get the more you can earn.

      Thanks for the comment!

  • Daniel Palmer Dec 9, 2016, 8:06 pm

    I like how you look at savings as a percentage rather than a fixed number- it can definitely give fresh perspective to your savings goals.
    However, I’d be hesitant to say that just anyone can increase their savings rate. For example, the single mom of three kids under 5 who barely has time for a regular job, let alone a side hustle and can barely keep her family feed, clothed, and housed, and is on the verge of losing the job she had because she missed work again since her 3 year old caught the flu at daycare.
    Having said that, there are also people who complain about lack of savings and could definitely be saving more…

    • Distilled Dollar Dec 9, 2016, 11:10 pm

      I agree that it would be HARD to find opportunities to save, in that particular situation. BUT, I’ll challenge you to find me one person who has their budget 100% optimized. In some ways, people who are overworked between family and jobs might even have more opportunities to find holes in their budget. The sad catch 22 is that they do not often have time to research/study ways they can save money.

      The first hurdle to saving/investing is always the mental one. Even people who make 2-3x the example case you brought up still “feel,” the same way – living paycheck to paycheck with “no room,” to increase their savings.

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